A recent change in the composition of the Dow Jones Industrial Average (DJIA), often referred to as the Dow Jones Industrial Average, is likely to significantly change the index’s future returns. June 29, Alphabet Inc. (GOOGLE) replaced Verizon Communications Inc. (VZ) as a component of the average, explains Bob Carlsoneditor Retirement hours.
Alphabet’s Class A shares are included in the Dow, but Class C shares, with the ticker symbol GOOG, are not. VZ has been underperforming market indices for many years, despite being one of the leading telecom companies and having a high dividend yield. GOOGL has been one of the largest and fastest growing companies in the world for many years.
Alphabet Inc. (GOOGL)
It’s important to understand that the Dow Jones Industrial Average is an average, not an index. The DJIA was created to model the performance of the stock market as a whole long before the advent of computers. What was needed was a market valuation method that could be calculated manually every day (or more often). The average price of 30 large companies was chosen as an indicator of the overall stock market.
Because the DJIA is an average of the prices of its constituent stocks, the price determines the weight of the stock on the average. The higher the price, the greater the weight of the stock on average.
GOOGL makes up about 4% of the DJIA and is its sixth or seventh largest component, depending on the day. For comparison, this is about 3.27% of S&P 500 Index (^SPX) and its fifth largest component. VZ, with a stock price of around $45, was on average underweight.
Both GOOGL and VZ operate in the communications services sector. But they have a completely different business. This change will increase DJIA’s access to digital advertising, cloud computing and artificial intelligence. The addition of GOOGL also means that five of the Magnificent Seven stocks are now in the DJIA, including Nvidia company (NVDA), Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Microsoft Corporation (MSFT).
The DJIA has long lagged the S&P 500 in total return. Owners of the Dow Jones Industrial Average likely want more competitive returns without eliminating the simplicity of the average.
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